When Betaworks acquired Digg for just $500,000 and declared it would re-build the news-sharing site from the ground up, the entire Web did a spit-take.

A turnaround of a consumer Web brand is just about the longest shot you can take in startup-land. Not to mention, Digg had 10 million uniques. Ten million eyeballs were only worth $500,000?

On stage at PandoMonthly tonight, Betaworks CEO John Borthwick explained what he saw in it: Digg had already been stripped of most of its valuable assets. The Washington Post acquired its team. LinkedIn had acquired some patents. All that was left was this domain, which had two consultants keeping it alive.

It cost $200,000 a month to keep Digg’s servers running. It earned around $230,000 a month from a weird ad deal with AOL. For starters, Borthwick knew he could lower those server costs to around $18,000 a month by upgrading to a modern stack.

He believed the Digg name had declined, but it hadn’t, in his words, “turned to mud.” It wasn’t quite a punchline yet, and it still represented news discovery and sharing to anyone who heard it.

Borthwick saw the 10 million uniques, and saw the struggles that his own news reader and discovery product, News.me, had had in breaking through the noise.

His thought was that if he stripped the site, put it on a 2012 stack, and built it back up from scratch, he could find out which of those 10 million uniques were real, engaged users that loved the brand. He said, “We’ll drop this puppy off the roof and see if it bounces. The uniques that come back will be real uniques.” He says “real uniques,” because an early survey Betaworks took of Digg users showed that 95 percent of them wouldn’t even recommend the site to a friend.

The new Digg, which Betaworks launched in six months, might have fewer users, but they are quality, engaged users that truly love it. Digg is now a bigger referrer to BuzzFeed than LinkedIn, Pinterest, or Google+, Borthwick noted.

People love the products they use, especially the ones they use every day. Even though Digg had terrible user ratings before Betaworks acquired it, “people [still] loved Digg,” Borthwick said. How people characterize themselves about their products isn’t that they are “users,” but that they are “lovers.” It is the creation and fostering of this love that makes for a successful product, Borthwick believes.

Take fashion-focused blog aggregator, Bloglovin, for example. Betaworks invested in the Swedish company over a year ago when it realized how rabid its users were. Bloglovin has 7 million uniques and did 100 million page views last month. Its users “just love it,” he said.

That is what Borthwick believes Betaworks’ job is: “To build exactly around that [love].” What logically follows is to create a business model that doesn’t work against this. So often, he explained, businesses have a product that people love and then institute a model that can end up destroying a business.

Borthwick sees Google as a perfect example of a smart business model. They spent billions of dollars perfecting ads that “went with the grain” of their successful product. As a result, Google’s ads are almost an improvement to the product, rather than a tax on it. This is often overlooked, he says. Google created a product that people loved and then created a business model that worked positively with that.

Conversely, Facebook — a product that people adore, has been unable to create an ad model that users also love. Borthwick put it bluntly, “Facebook ads are terrible.”

Products like Digg, and others at Betaworks, aim to graft onto this idea of “love” for a product. It’s irrational at times, but sometimes products just click.

"Betaworks is building a version of the Web that CEO John Borthwick and his team of builders want to live in — spartan-designed media on top of apps on top of utilities that all disjointedly make the social Web a better place, leveraging one another to do it." - Erin Griffith, Pando Daily

- portfolio includes Tumblr, Twitter, Kickstarter, as well as up-and-comers like RapGenius, Grand St., Branch and IFTTT
- bought Digg for $500k, rebuilt from scratch
- bought Instapaper, the original “read later” product from former Tumblr CTO Marco Arment
- built Dots, the insanely addictive game
- built Giphy, a gif search engine
- built Bit.ly, the first link shortener

Erin covers New York startups for PandoDaily. She's worked as staff writer for Adweek and a private equity blogger for peHUB. Her writing has appeared in VCJ, Time Out New York, Huffington Post, FT.com, and BUST. She plays keyboard in a band called Team Genius and tweets as @Eringriffith. Cale graduated from Reed College with a degree in Political Science. He lives in Brooklyn, drinks coffee sometimes, and this is his Twitter.

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